Tuesday, November 10, 2009

Economic Recovery

The main barrier to economic recovery is the Keynesian philosophy used by the Obama administration. The concept of demand stimulation in the face of rising taxes and unemployment is preposterous! People, if they are sent $500, are going to save it if they feel their job is threatened.

Programs such as new home buyer credit or "Cash for Klunkers" generates an unsustainable bump in home and car sales. But as soon as the government money runs out, all the indicators resume going south.

Naturally, the administration will say "we need another stimulus". But the dilemma here is that as the government continues to borrow money from foreigners or runs the printing presses (the Fed buying its own bonds flooding the economy with more dollars), inflation becomes inevitable and the buyers of government instruments will demand higher and higher interest rates.

When the zero risk interest rate (such as on T-bills) goes to 12% (as it did in 1974 under Carter), other interest rates add to this, meaning that the economy is quashed by increasingly expensive and increasingly unavailable loans. It makes no sense for a business to borrow at 15% if the return on assets is only 6%.

Thus, it is safe to say there will BE NO RECOVERY as long as the present administration is in control.